First off, what exactly qualifies as commercial multifamily real estate? Basically, it’s a residential property with at least five separate units or dwellings. As an investment, it’s less risky than betting on income from single-family residences, because a vacancy doesn’t hit you as hard—think of an empty house generating no money at all versus one empty apartment out of ten.

Multifamily properties can be a smart investment, and there are a range of ways to fund it; you just have to decide which one is right for you.

Cash or Cash Equivalents

You hear about people paying in cash all the time, and it’s easy to picture bundles of twenties stacked in a briefcase, but cash isn’t just the literal green stuff, it’s any available money you have—meaning dollars that are not held in a qualified account with strings attached to withdrawals. Besides actual paper currency you may have in a safe deposit box, examples include money in stocks and mutual funds, CDs, and savings accounts.

Any of this money can be put to good use in multifamily real estate, which tends to be a very stable asset, but make sure that this is “extra” money. You need to protect a certain amount of savings or cash reserves for unexpected expenses like job loss, injuries, and other emergency situations.

It should also be noted that using cash comes with tax benefits. Commercial multifamily investments generate depreciation, an on-paper loss that allows for a tax deduction that can, in some cases, eliminate the need pay taxes on the property’s income for three to seven years.

Trusts can be used for investing in multifamily real estate in a similar way to cash investments, with the trust name as the investor and the trustee as the signatory. Because there are so many different forms of the estate management tools known as trusts, you should work closely with tax and real estate professionals to figure out the best course of action.

Qualified Accounts

Qualified accounts include government-approved retirement accounts, and self-directed qualified accounts that allow you to invest in almost any asset while keeping the tax advantages of an IRS-protected retirement account. Keep in mind, so-called self-directed accounts through brokerage firms aren’t usually fully self-directed; they want you to choose your investments from a list they provide, instead of directly investing your money in hard assets like real estate.

There are also tax-deferred accounts—such as self-directed IRAs, self-directed SEP-IRAs, Keogh to self-directed rollover IRAs, self-directed solo 401Ks, and 401K to self-directed rollover IRAs—that allow you to invest pre-tax dollars and benefit from tax-free growth, but any withdrawals you make will be taxed at standard rates.

Investment from any of these kinds of qualified accounts won’t give you the benefit of depreciation on paper, since the accounts already have tax advantages built-in. However, being able to take part in a stable real estate investment using pre-tax money and benefiting from tax-free growth more than makes up for it.

Then there’s the Roth IRA, which may be your best option. These accounts take post-tax money, but future gains and withdrawals are all tax-free, making them a great long-term option for stable, income-producing growth that can benefit you for the rest of your life.

Smart Borrowing

If you are able to borrow at a lower rate in order to gain returns at a higher rate, or if you can borrow in a way that allows you to transition qualified money into cash without a penalty, then you have the kind of intelligent borrowing that can be useful for investments.

A home equity loan or line of credit is one type of intelligent borrowing—if, for example, you can borrow at 3% when you can expect to get a yield of 6% or more. You’ll get the same tax advantages as cash investments, and you may be able to deduct the interest, depending on the size of the loan and your income.

Loans from company-sponsored 401K plans are another option. You may be able to borrow up to $50,000, or 50 percent of the balance in the account, whichever one is lower. Then you use the excess income to pay back the loan, pay the 6% interest back to yourself, and benefit from the equity growth of an income-earning asset.

Lastly, you can take out a loan from a Whole Life Insurance policy, but this won’t make sense unless the policy has already been completely set up and funded, which takes up to five years.

No matter how you decide to borrow for investment, you’ll find that when it comes to real estate, lenders usually prefer financing multifamily properties over single-family properties, even though they tend to be more expensive. That’s because the month to month cash flow generated by these properties tends to be much higher, meaning much less risk of people defaulting on their loans.

Real Estate

Whether you decide to sell raw land, possibly inherited, that is only sitting there, costing you more money each year in property taxes, or you decide to build on land that is in a growth area to maximize its appreciation and turn it into an income-producing asset, real estate is an investment that you can use to further other real estate investments. Make sure you consult a professional who can give you solid advice on the best way to proceed.

Under-performing Residential Income Property

Cash flow homes and other residential income property can be a great investment when you have no shortage of renters, or when you can buy low and sell high, but neither outcome is guaranteed. For the most part, purchasing and managing residential income property is best regarded as a profession rather than a passive investment. It takes a lot of work to make a profit in this way. Multifamily real estate, however, is a lot more passive and a lot more profitable, so if you own single-family properties, you may want to consider selling and transitioning into a multi-family property.

When you have all your rental units in one location, it becomes much easier to manage both tenants and maintenance. With the income generated from the property, you could also hire employees to manage the units for you, taking on the work of phone calls, audits, rent, maintenance supervision, and more.

No matter how you choose to approach the investment, commercial multifamily properties are a smart way to make your money work for you. Consult with a real estate agent to learn more about what’s available in your area.

Georgia Commercial Real Estate

Patty Burns and Trip Wilhoit are Georgia's Commercial Real Estate experts. They have properties listed throughout the state of Georgia. Patty and Trip specialize in Investment, Property Management, Retail, Warehouse and Industrial property.